One million SMSF players

The Australian Tax Office has declared that Australia has 1,006,975 Self-Managed Super Fund (SMSF) members as of March 2014.This is up from 524,000 in 2004. It is a massive vote of no confidence in the institutional system. Credit Suisse has this to say, complete with stock recommendations:

"If Selfie-ville was an Australian city, it would be the sixth most populous (after Adelaide). Selfies are individuals who manage their own Australian pension savings. We have previously noted they are one of the largest marginal equity investors and are a reason why the dividend trade continues to perform within the Australian equity market. Our +1mn Selfies manage 528,701 individual funds. Current legislation allows up to four members per fund. There are usually two. The ATO estimates that Selfies control $547bn in net assets under management or around a third of all Superannuation assets in Australia. This has grown from $482bn in the past 12 months.

The median SMSF dollar is managed by individuals in their early 60s. These Selfies have grown their AUM by more than five times in 10 years mostly via being diligent savers. We can see why Selfies are conservative investors. They are on the verge of retirement and they are risking their own hard earned savings. Selfies' conservative approach means they are natural buyers of high dividend payout stocks — these stocks also tend to be the least volatile. However, Selfies' risk aversion provides an opportunity for other investors who can tolerate more volatility. We highlight companies that are forecast to raise dividend payments significantly over the next two years, and as they do, expect them to be more closely monitored by Selfies. Investors should consider buying these companies now in anticipation of selling to less risk tolerant investors like Selfies later. They include Caltex, Fairfax, Flight Centre, Myer and Perpetual."

These are massive sums, which are transforming Australia's capital markets. It is especially important in the stock market, placing a heavy bias on dividend paying stocks:

"Of the $547bn in SMSFs, $241bn is in equities. Selfies' equity allocation has increased by 110 basis points over the past 12 months and now stands at 43.1%. We estimate they currently own 16.1% of the Australian equity market either directly or indirectly. A further 28% of this enormous pool of assets is in cash. This is down 160 basis points over 12 months."

There is also a plunge into property:

"Finally, they own $134bn worth of property which makes up 24% of their allocation. This has increased over the past 12 months."

CS reckons SMSFs have proven to be "solid" investors, posting respectable after tax returns. But they are underweight in bonds, according to CS. Bonds are tradionally a way to reduce the effects of volatility, working in the opposite way to the stock market. In part this is because it is hard to get access to bonds at the retail level, meaning it is only possible to buy wholesale funds, which means the bond investment is one step removed. This is a difference between SMSFs and large institutions, which can buy large bond issues directly (the minimum is typically $500,000 to buy direct, which obviously is too big for SMSFs.)

"Selfies continue to remain grossly underweight bonds. This is obviously because fixed income instruments are not as readily accessible to Selfies as other assets are. Also, it is suggested that cash is high yielding enough to replace bonds in an Australian portfolio.

"We think cash is a poor replacement for bonds. Bond returns are usually negatively correlated with equities which help balance portfolio returns — especially during brutal equity bear markets. An allocation of 50% Aussie equities and 50% 10-year Aussie government bonds has lost money in only three of the past 34 years (Figure 4). One hundred dollars invested in June 1979 is now worth $4,740. Meanwhile, cash tends to have a zero or even a small positive correlation with equities so it does not provide the same "portfolio relief" during stock market sell-offs. An allocation of 50% Aussie equities and 50% cash (term deposits) has lost money in five of the past 34 years. One hundred dollars invested in June 1979 would now be worth 'just' $2820. As retirement age looms closer we imagine Selfies would not want their portfolios overly exposed to a single asset. Our concern is that important investment lessons like this are often learnt too late."

CS gives a quick picture of what a typical SMSF investor looks like. Typically, the age is about 60, has about $864,000 in self-managed assets and is likely to be a co-member of a fund with his spouse:

"They currently have $1.73mn in their fund. ATO data suggests they have had their fund for about 10 years. While they seem wealthy and almost ready for retirement now, they have come a long way over the past 10 years. Back in June 2004, when they were in their early 50s, we calculate they started their fund with just $323,000. So Mr and Mrs Selfie have managed to grow their AUM by more than five times in just 10 years — an achievement many institutional investors would like to replicate. This five times increase is equivalent to $1.4mn."